GoGo Juice is a combination gas station and convenience store that is located at a busy intersection

Question:

GoGo Juice is a combination gas station and convenience store that is located at a busy intersection in a major metropolitan area. Recently, a national chain opened a similar store two blocks away, and, as a result, GoGo Juice€™s profits have decreased. In an effort to boost profit, GoGo Juice is considering running a special promotion. Under the special promotion, customers would receive $0.01 in free merchandise for every $0.20 spent on gasoline. For example, a customer purchasing $12.60 in gasoline would receive ($12.60/$0.20) Ã— .01 = $0.63 in free merchandise (the customer could use the $0.63 toward the purchase of a soda, candy bar, etc.).
Management of GoGo Juice believes that the special promotion will increase gasoline sales by 8% from their current levels. In addition, management believes that overall merchandise sales will increase by 12% from their current levels. Most of the increase in merchandise sales will result from persons redeeming their free merchandise money indeed, management expects that everyone will use their free merchandise money.
However, merchandise sales also are expected to increase because, in the process of using their free merchandise money, people will spend more. For example, a person receiving $0.63 in free merchandise may decide to purchase a $0.75 candy bar (thus, the individual will have to pay GoGo Juice $0.12 for the candy bar). Without the free merchandise money, this same person might not have purchased the candy bar (i.e., he or she may only have purchased gasoline).
The following table provides data regarding current monthly sales and variable costs for both gasoline and merchandise:

GoGo Juice also incurs fixed costs of $60,000 per month.

Required:
a. Does GoGo Juice€™s decision deal with excess supply or excess demand?
b. By how much is GoGo Juice€™s monthly profit expected to change if it runs the special promotion?
c. Assume that GoGo Juice is considering altering the special promotion in the following way: Rather than give $0.01 in free merchandise for every $0.20 spent on gasoline, management would give customers $0.50 in free merchandise for every $10.00 spent on gasoline. Under this scheme, a customer spending $8.00 on gasoline would not receive any free merchandise, whereas a customer spending $18.00 on gasoline would receive $0.50 in free merchandise. Discuss what you perceive to be the costs and benefits of altering the special promotion in thisfashion.